Order Code RL30981
CRS Report for Congress
Received through the CRS Web
Panama: Political and Economic
Conditions and U.S. Relations
Updated November 16, 2006
Mark P. Sullivan
Specialist in Latin American Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Panama: Political and Economic
Conditions and U.S. Relations
Summary
With four successive elected civilian governments, the Central American nation
of Panama has made notable political and economic progress since the 1989 U.S.
military intervention that ousted the regime of General Manuel Noriega from power.
The current President, Martín Torrijos of the Democratic Revolutionary Party (PRD),
was elected in May 2004 and inaugurated to a four-year term on September 1, 2004.
Torrijos, the son of former populist leader General Omar Torrijos, won a decisive
electoral victory with almost 48% of the vote in a four-man race. He succeeded
President Mireya Moscoso of the Arnulfist Party (PA), elected in 1999, whose
administration was tainted by several high-profile corruption scandals. Torrijos’
electoral alliance also won a majority of seats in the unicameral Legislative
Assembly.
The most significant challenges facing the Torrijos government have included
dealing with the funding deficits of the country’s social security fund; developing
plans for the expansion of the Panama Canal; and combating unemployment and
poverty. After protests and a protracted strike by construction workers, doctors, and
teachers in 2005, the Torrijos government was forced to modify its plans for
reforming the social security fund. In April 2006, the government unveiled its
ambitious plans to build a third lane and new set of locks that will double the Canal’s
capacity. A constitutionally required referendum on the expansion project was held
on October 22, 2006, with 78% of voters supporting the project.
The United States has close relations with Panama, stemming in large part from
the extensive linkages developed when the Panama Canal was under U.S. control and
Panama hosted major U.S. military installations. The current bilateral relationship is
characterized by extensive cooperation on counternarcotics efforts, assistance to help
Panama assure the security of the Canal and its border with Colombia, and
negotiations for a bilateral free trade agreement. The United States provided Panama
with $19 million in foreign aid in FY2005, and an estimated $14.4 million in
FY2006. The FY2007 request is for $17.4 million, with $4 million under the Andean
Counterdrug Initiative and $3.2 million in development assistance.
U.S.-Panamanian negotiations for a bilateral free trade agreement began in late
April 2004. A ninth round held in Washington ended in mid-January 2006, with
disagreement on sanitary control systems for U.S. products and animals to enter the
Panamanian market. Panama is seeking an FTA as a means of increasing U.S.
investment in the country, while the Bush Administration has stressed that an FTA,
in addition to enhancing trade, would further U.S. efforts to strengthen support for
democracy and the rule of law. FTA negotiations had been suspended in the lead up
to the Canal expansion referendum, but some observers believe that an agreement
still could be finalized by the end of 2006.
For additional information, see CRS Report RL32540, The Proposed U.S.-
Panama Free Trade Agreement, by J.F. Hornbeck.

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Contents
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Political Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
From the Endara to the Moscoso Administration . . . . . . . . . . . . . . . . . . . . . 2
Endara Government (1989-1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Pérez Balladares Government (1994-1999) . . . . . . . . . . . . . . . . . . . . . . 2
Moscoso Government (1999-2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Torrijos Government (2004-2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Human Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
U.S. Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Background and Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Drug Trafficking and Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
U.S. Trade Relations and a Potential Free Trade Agreement . . . . . . . . . . . 10
Operation and Security of the Panama Canal . . . . . . . . . . . . . . . . . . . . . . . 13
Historical Background and the Panama Canal Treaties . . . . . . . . . . . . 13
Canal Transition and Current Status . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Canal Expansion Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Privatization of Two Panamanian Ports and the China Issue . . . . . . . 16
Contamination of Firing Ranges and San Jose Island . . . . . . . . . . . . . . . . 18
Former U.S. Military Presence in Panama . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Former Role and Presence of U.S. Troops . . . . . . . . . . . . . . . . . . . . . . 20
Failed Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
U.S. Congressional Views on U.S. Military Presence . . . . . . . . . . . . . 22
Panamanian Views on U.S. Military Presence . . . . . . . . . . . . . . . . . . 23
List of Figures
Figure 1. Map of Panama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

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Panama: Political and Economic
Conditions and U.S. Relations
Most Recent Developments
On November 7, 2006, Panama was elected to hold a two-year rotating Latin
America seat on the U.N. Security Council. The country had emerged as a consensus
candidate on November 1, 2006, after 47 rounds of voting between Guatemala and
Venezuela. During those rounds, Guatemala, the U.S.-backed candidate, had
received about 25-30 votes more than Venezuela, but neither country received the
two-thirds vote needed for the seat. Many observers attribute Venezuela’s defeat, at
least in part, to President Hugo Chávez’s strong anti-American speech before the
U.N. General Assembly in September. In the context of Panama’s close relations
with the United States, the election of Panama to the seat bodes well for U.S.
interests at the United Nations compared to the potential of Venezuela winning the
seat.
In a national referendum held on October 22, 2006, Panamanians approved the
Torrijos government’s Canal expansion project with over 78% support.
In mid-October 2006, the Centers for Disease Control and Prevention (CDC)
helped Panama solve the mystery of recent deaths ultimately traced to contaminated
cough syrup and other medications including antihistamine tablets, calamine lotion,
and rash ointment. As of mid-November 2006, 42 people had died from the
contamination. As part of the government’s response, President Torrijos announced
a proposal to revamp the health system by creating an autonomous authority to
control the quality of medicines and services.
Political Conditions
Panama has made notable political and economic progress since the December
1989 U.S. military intervention that ousted the military regime of General Manual
Antonio Noriega from power. The intervention was the culmination of two and a
half years of strong U.S. pressure against the de facto political rule of Noriega,
commander of the Panama Defense Forces (PDF). Since that time, the country has
had four successive civilian governments, with the current government of President
Martín Torrijos elected in May 2004 to a four-year term. Inaugurated on September
1, 2004, Torrijos is the son of former populist leader General Omar Torrijos. His
electoral alliance, led by the Democratic Revolutionary Party (PRD), also won a
majority of seats in the unicameral Legislative Assembly.

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CRS-2
From the Endara to the Moscoso Administration
Endara Government (1989-1994). Before the U.S. intervention, Panama
had held national elections in May 1989, and in the presence of a large number of
international observers, the anti-Noriega coalition, headed by Guillermo Endara,
prevailed by a three-to-one margin. The Noriega regime annulled the election,
however, and held on to power. By the fall, the military regime was losing political
power and relied increasingly on irregular paramilitary units, making the country
unsafe for U.S. forces and U.S. citizens. On December 20, 1989, President George
Bush ordered the U.S. military into Panama “to safeguard the lives of Americans, to
defend democracy in Panama, to combat drug trafficking, and to protect the integrity
of the Panama Canal Treaty.” Noriega was arrested on January 3, 1990, and brought
to the United States to stand trial on drug trafficking charges.1
As a result of the intervention, the opposition coalition headed by Guillermo
Endara that had won the May 1989 election was sworn into office. During his term,
President Endara made great progress in restoring functioning political institutions
after 21 years of military-controlled government, and under his administration, a new
civilian Public Force replaced Noriega’s Panama Defense Forces. But Endara had
difficulties in meeting high public expectations, and the demilitarization process was
difficult, with some police and former military members at times plotting to
destabilize, if not overthrow, the government.
Pérez Balladares Government (1994-1999). In May 1994, Panamanians
went to the polls to vote in presidential and legislative elections that observers called
the freest in almost three decades. Ernesto Pérez Balladares, candidate of the former
pro-Noriega Democratic Revolutionary Party (PRD), who led a coalition known as
“United People”, won with 33% of the vote. Placing a surprisingly strong second,
with 29% of the vote, was the Arnulfista Party (PA) candidate, Mireya Moscoso de
Gruber, heading a coalition known as the “Democratic Alliance.”
In the electoral race, Pérez Balladares campaigned as a populist and advocated
greater social spending and attention to the poor. He stressed the need for addressing
unemployment, which he termed Panama’s fundamental problem. Pérez Balladares
severely criticized the Endara government for corruption, and he was able to
overcome attempts to portray him as someone closely associated with General
Noriega. (Pérez Balladares served as campaign manager during the 1989 elections
for candidate Carlos Duque, who the Noriega regime had tried to impose on the
electorate through fraud.) Instead, Pérez Balladares focused on the PRD’s ties to the
populist policies of General Omar Torrijos, whose twelve-year (1969-1981) military
rule of Panama ended when he died in a plane crash in 1981.
1 After a seven-month trial, Noriega was convicted on 8 out of 10 drug trafficking counts
in U.S. federal court in Miami in April 1992, and he was sentenced to 40 years in prison. In
1999, a federal judge reduced Noriega’s prison term to 30 years because of disparity
between his sentence and his co-conspirators. The reduction makes Noriega eligible for
parole in 2007.

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CRS-3
President Pérez Balladares implemented an economic reform program and
worked closely with the United States as the date of the Panama Canal turnover
approached. Under his government, Panama and the United States held talks on the
potential continuation of a U.S. military presence in Panama beyond the end of 1999
(the date Panama was to assume responsibility for defending the Canal). Ultimately
negotiations ended without such an agreement. (For more see “Former U.S. Military
Presence in Panama” below.)
Although Panama’s constitution does not allow for presidential reelection,
President Pérez Balladares actively sought a second term in 1999. In 1997, the PRD
had begun studying the possibility of amending the constitution to allow a second bid
for the presidency in the May 1999 elections. Ultimately, a referendum was held on
the issue in August 1998 but failed by a large margin.
Late in his administration, Pérez Balladares became embroiled in a scandal
involving the illegal sale of visas to Chinese immigrants attempting to enter the
United States via Panama. As a result, U.S. officials cancelled the former president’s
U.S. tourist visa in November 1999.2
Moscoso Government (1999-2004). In her second bid for the presidency,
Arnulfista Party (PA) candidate Mireya Moscoso was victorious in the May 1999
elections. Moscoso, who was inaugurated September 1, 1999, for a five-year term,
captured almost 45% of the vote and soundly defeated the ruling PRD’s candidate
Martin Torrijos (son of former populist leader Omar Torrijos), who received almost
38% of the vote. Until March 1999, Torrijos had been leading in opinion polls, but
as the election neared, the two candidates were in a dead heat. A third candidate,
Alberto Vallarino, heading a coalition known as Opposition Action, received about
17% of the vote.
President Moscoso, a coffee plantation owner and Panama’s first female
president, ran as a populist during the campaign, promising to end government
corruption, slow the privatization of state enterprises, and reduce poverty. She also
promised to ensure that politics and corruption did not interfere with the
administration of the Canal. The memory of her husband Arnulfo Arias, a nationalist
who was elected three times as president, but overthrown each time, was a factor in
the campaign, particularly since Arias was last overthrown in 1968 by General Omar
Torrijos, the father of the PRD’s 1999 and 2004 presidential candidate.
Although Moscoso took the presidency, the PRD-led New Nation coalition won
a majority of 41 seats in the 71-member unicameral Legislative Assembly. Just days
before her inauguration, however, Moscoso was able to build a coalition, with the
support of the Solidarity Party, the Christian Democratic Party (which later became
the Popular Party), and the National Liberal Party, that gave her government a one-
seat majority in the Assembly. In August 2000, the Christian Democrats deserted the
coalition and formed an alliance with the principal opposition, the PRD. However,
corruption scandals in 2002 led to five PRD legislators defecting to support the
2 “Ex-Leader of Panama Linked to Visa Sales,” Washington Post, Nov. 27, 1999; Pablo
Bachelet, “U.S. Uses Visas to Combat Corruption,” Miami Herald, Feb. 21, 2006.

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CRS-4
Moscoso government, once again giving the President majority support in the
Legislative Assembly.
As noted above, Moscoso was elected as a populist, with pledges to end
government corruption and reduce poverty, but her campaign pledges proved difficult
to fulfill amid high-profile corruption scandals and poor economic performance. As
a result, the President’s popularity declined significantly from a 70% approval rating
when she first took office in 1999 to only 15% in 2004.3
Torrijos Government (2004-2009)
On May 2, 2004, Panama held elections for president, as well as for a 78-
member Legislative Assembly. In the presidential race, Martín Torrijos of the PRD
won a decisive victory with 47.5% of the vote, defeating former President Guillermo
Endara, who received 30.6% of the vote, and former Foreign Minister José Miguel
Alemán, who received 16.4% of the vote. Torrijos’ electoral alliance also won a
majority of seats in the unicameral Legislative Assembly, 43 out of 78 seats, which
should provide him with enough legislative support to enact his agenda. Elected at
40 years of age, Torrijos spent many years in the United States and studied political
science and economics at Texas A&M University. He served four years under the
Perez Balladares government as deputy minister of interior and justice, and as noted
above, became the PRD’s presidential candidate in the 1999 elections.
Leading up to the election, Torrijos had been topping public opinion polls, with
42-49% support. In the campaign, he emphasized anti-corruption measures as well
as a national strategy to deal with poverty, unemployment, and underdevelopment.
He was popular among younger voters and had a base of support in rural areas.
Torrijos maintained that his first priority would be job creation.4 He called for the
widening of the Canal, a project that would cost several billion dollars, and would
seek a referendum on the issue. During the campaign, all three major candidates
supported negotiation of a free trade agreement with the United States, maintaining
that it would be advantageous for Panama. Endara and Alemán appeared to
emphasize the protection of some sensitive Panamanian sectors such as agriculture,
while Torrijos stressed that such an agreement would make Panama’s economy more
competitive and productive.5
The most significant challenges facing the Torrijos government have included
dealing with the funding deficits of the country’s social security fund (Caja de Seguro
Social, CSS); developing plans for the expansion of the Panama Canal; and
combating unemployment and poverty. After protests and a protracted strike by
construction workers, doctors, and teachers in June 2005, the Torrijos government
3 “Toss Up Between Torrijos and Endara,” Caribbean and Central America Report, Feb. 17,
2004.
4 Frances Robles, “Ex-leader’s Son Wins Presidency in Panama,” Miami Herald, May 3,
2004.
5 “Panama: Presidential Candidates Remark on FTA with US,” La Prensa (Panama), Jan.
24, 2004, translated by Foreign Broadcast Information Service.

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CRS-5
was forced to modify its plans for reforming the social security fund. After a national
dialogue on the issue, Panama’s Legislative Assembly approved a watered-down
version of the original plan in December 2005. The enacted reform did not raise the
retirement age but will gradually increase required monthly payments into the system
and introduces a dual pension system that combines aspects of privatization with the
current system.6
In April 2006, the government unveiled its ambitious plans to build a third set
of locks that will allow larger post-Panamax ships to transit the Canal. Panama’s
Cabinet approved the expansion plan on June 14, and the Legislative Assembly
approved it on July 10, 2006. A referendum on the expansion project took place on
October 22, 2006, with 78% supporting the project. The referendum in part can also
be viewed as support for the Torrijos government, which advanced the project as
integral to Panama’s future economic development. (For more, see “Canal
Expansion Plans” below.)
Human Rights
The Panamanian government generally respects human rights, but, as noted by
the State Department in its human rights report for 2005 (issued in March 2006),
serious human rights problems continue in a number of areas. Prison conditions
overall remained harsh, with reported abuse by prison guards. Prolonged pretrial
detentions remained a problem. According to the human rights report, the judiciary
is subject to political manipulation, and the criminal justice system is inefficient and
often corrupt.
Over the past several years, Panama had been criticized by the State Department
and international human rights groups for vestiges of “gag laws” used by the
government to silence those criticizing policies or officials, but in May 2005,
Panama’s legislature repealed these restrictive laws. The State Department’s 2005
human rights report maintained that in the past, the government and public figures
used libel and disrespect-for-authority laws to intimidate journalists or hurt the
reputation of a particular government institution or leader. In August 2004, outgoing
President Mireya Moscoso pardoned many journalists charged with libel and related
crimes. Under the Torrijos government, Panama’s legislature gave its final approval
in May 2005 to repeal the “gag laws” that restricted freedom of the press, although
the State Department 2005 human rights report noted that 15 libel cases against
journalists were pending. The U.S.-based Committee to Protect Journalists lauded
Panama’s steps to improve its press freedom by repealing many of its gag laws, but
expressed concern that journalists were not shielded from criminal penalties, with
Panama’s penal code still including criminal defamation provisions allowing for
penalties of up to two years in prison.7
In an attempt to redress human rights abuses that occurred under military rule
and to prevent their reoccurrence, President Moscoso created a Truth Commission
6 Marion Barbel, “Panamanian Congress Approves Modified Social Security Reform,”
World Markets Research, Dec. 22, 2005
7 Committee to Protect Journalists. Attacks on the Press in 2005.

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CRS-6
in January 2001 to investigate violations under the military regime. The Truth
Commission (subsequently re-established as the Office of Truth Commission
Continuation) issued its report in April 2002, and its investigations have been used
by the government to reopen some past human rights cases. The Commission has
recommended that the government investigate 33 cases of killings or disappearances
committed during the 1968-1989 period of military rule. In July 2006, just as one
of the first human rights trials was approaching an end, a former military officer
implicated in the 1970 killing of activist Heliodoro Portugal died from an apparent
heart attack. There are reportedly 110 human rights cases involving the torture,
incarceration, murder, or disappearance of political activists under the period of
military-dominated government.8
With regard to worker rights in Panama, the State Department’s 2005 human
rights report noted that unions and collective bargaining are permitted in export
processing zones (EPZs) but noted that the International Labor Organization’s
Committee of Experts questioned the government as to whether these workers have
the right to strike. Panama’s law regulating the EPZs does not include arbitration or
specify procedures to resolve labor disputes. The State Department report also noted
that child labor was a problem, with violations occurring most frequently in rural
areas at harvest time and in the informal sector, where many children work as “street
vendors, shoe shiners, cleaning windows, washing cars, bagging groceries in
supermarkets, picking trash, or simply begging for money.”
Economic Conditions
Panama’s service-based economy has performed well in the last several years,
with economic growth rates of 4.2% in 2003, 7.6% in 2004, 6.4% growth in 2005,
and an estimated 7.4% in 2006. With a per capita income level of $4,450 in 2004,
Panama is classified by the World Bank as an upper-middle-income developing
country. Yet income distribution remains highly skewed with large disparities
between rich and poor. In October 2005, the Torrijos government launched an anti-
hunger and anti-poverty program targeting the rural population and an indigenous
community in a central rural province. Unemployment has fallen for the past four
years, averaging 9.6% in 2005 and projected to average 8.8% in 2006. The Torrijos
government has pledged to tackle job creation and infrastructure improvement in
2006.9
The administration of President Pérez Balladares (1994-1999) implemented an
economic reform program that included liberalization of the trade regime,
privatization of state-owned enterprises, the institution of fiscal reform, and labor
code reform. Tariffs were reduced to an average of 8%. The Moscoso government
partially reversed the trade liberalization process by raising tariffs on some
8 Steven Dudley, “Justice Elusive for Victims of Panama’s Ex-Dictators,” Miami Herald,
September 29, 2006.
9 “Panama: Country Report,” Economist Intelligence Unit, October 2006.

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CRS-7
agricultural products, some of which reached the maximum rate allowed under
Panama’s World Trade Organization obligations.10
Although Panama has traditionally eschewed economic linkages and integration
schemes with its Central American neighbors (largely because of its privileged
relationship with the United States), it has joined with Mexico and Central American
states in a regional economic project known as the Puebla-Panama plan. The plan,
which has the goal of spurring development in the region, will improve highways,
standardize customs procedures, and join power grids to improve the quality of life
in the region.
As part of its strategy of increasing its global trade and investment links, and
accentuating its role as a global transportation hub, Panama has pursued free trade
agreements (FTAs) with several countries, including the United States (see “U.S.
Trade Relations and a Potential Free Trade Agreement” section below). In June
2003, an FTA with El Salvador entered into force, and in March 2003 Panama
negotiated a framework agreement with the five Central American countries. In
June 2006, Panama signed an FTA with Chile. Beyond the Western Hemisphere,
Panama negotiated an FTA with Taiwan that entered into force in January 2004, and
in April 2005, Panama and Singapore announced the conclusion of talks for a free
trade agreement that was ratified in June 2006.
U.S. Relations
Background and Overview
The United States has close relations with Panama, stemming in large part from
the extensive history of linkages developed when the Panama Canal was under U.S.
control and Panama hosted major U.S. military installations. Today, about 25, 000
U.S. citizens reside in Panama, many retirees of the former Panama Canal
Commission. U.S. officials congratulated Panama on the success of the October 2006
Canal expansion referendum but also asserted that the challenge for the government
is to ensure that the expansion project is conducted with transparency and without
any hint of corruption.11
The current U.S. relationship with Panama is characterized by extensive
cooperation on counternarcotics efforts as well as U.S. assistance to help Panama
assure the security of the Canal and the security of its border with Colombia. Panama
was one of several Latin American nations that publicly supported the United States
during the war with Iraq as a member of the “coalition of willing.” As noted above,
U.S.-Panamanian negotiations for a bilateral FTA began in April 2004. Panama is
10 United States Trade Representative, 2006 National Trade Estimate Report on Foreign
Trade Barriers, p. 501.
11 U.S. Department of State, U.S. Embassy Panama, “Principle Deputy Assistant Secretary
Charles S. Shapiro at Panama Week,” and “Ambassador Eaton’s Remarks at the Panama
Week Power Breakfast,” October 2006.

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CRS-8
seeking an FTA as a means of increasing U.S. investment in the country, while the
Bush Administration has stressed that an FTA with Panama, in addition to enhancing
trade, would further U.S. efforts to strengthen support for democracy and the rule of
law.
The United States turned over control of the Canal to Panama at the end of
1999, according to the terms of the 1977 Panama Canal Treaty, at which point
Panama assumed responsibility for operating and defending the Canal. All U.S.
troops were withdrawn from Panama at that time and all U.S. military installations
reverted to Panamanian control. However, under the terms of the Treaty on the
Permanent Neutrality and Operation of the Panama Canal, or simply the Neutrality
Treaty, the United States retains the right to use military force if necessary to reopen
the Canal or restore its operations.
Before the turnover of the Canal and the closure of U.S. military bases in 1999,
the United States conducted negotiations with Panama beginning in 1995 for a
Multinational Counternarcotics Center that would have extended the U.S. military
presence in Panama for a 12-year period with an explicit focus on drug interdiction.
Although a tentative agreement was reached in 1997, the negotiations ultimately
broke down in 1998, largely because of Panama’s internal politics. An issue that
received considerable attention in the U.S. Congress before the turnover of the Canal
and U.S. bases in 1999 involved allegations that China could threaten the operation
of the Panama Canal because of its links to a Hong Kong company operating ports
at both ends of the Canal. Both State Department and Department of Defense
officials have indicated that the port operations do not constitute a threat to the Canal.
Panama did not agree to a continued U.S. military presence, but the country does
cooperate extensively with the United States on counternarcotics efforts. In 2002,
the two countries signed an agreement to conduct joint patrols for drug interdiction.
While the government has made significant efforts to strengthen its anti-money
laundering regime since 2000, the State Department’s March 2006 International
Narcotics Control Strategy Report maintains that Panama needs to remain vigilant
to the threat that money laundering poses to the stability of the country’s legitimate
financial institutions.
U.S. assistance to Panama increased annually from FY2001-FY2005, with the
country receiving counter-narcotics assistance under the Bush Administration’s
Andean Counterdrug Initiative (ACI)12, but assistance levels began to drop in
FY2006. The United States provided $8.2 million in total foreign assistance to
Panama in FY2001, $16.2 million in FY2002, $16.7 million in FY2003, $18.2
million in FY2004, and $19 million in FY2005. For FY2006, an estimated $14.4
million in foreign assistance will be provided. The Administration’s FY2007 request
is for $11.7 million, including $4 million in ACI assistance, $3.2 million in
development assistance, $1.4 million in military assistance, and $3 million for a
Peace Corps program.
12 For more information, see CRS Report RL33370, Andean Counterdrug Initiative (ACI)
and Related Funding Programs: FY2007 Assistance, by Connie Veillette.

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A sensitive issue in U.S.-Panamanian relations has been Panama’s desire to
have the United States clean up three contaminated firing ranges in Panama as well
as San Jose Island, which was contaminated with chemical weapons used in training
exercises during World II. With regard to the firing ranges, U.S. officials maintain
that the United States has already met its treaty obligations to clean up the ranges.
With regard to the cleanup of San Jose Island, Panama rejected a U.S. offer in
September 2003 that would have provided equipment and training so that Panama
could clean up the island; the Panamanian government maintains that it did not want
to sign any agreement releasing the United States from liabilities.
President Bush visited Panama on November 7, 2005, on his way back from the
fourth Summit of the Americas held in Argentina. During the visit, President Bush
endorsed the concept of widening the Canal and indicated that the two countries were
close to completing negotiations for a free trade agreement. While in Panama,
President Bush also rejected Panama’s calls to remove unexploded ordnance from
former U.S. firing ranges that were returned to Panama in 1999. According to the
President, “we had obligations under the treaty, and we felt like we met those
obligations.” Despite the disagreement, President Bush indicated that Panama and
the United States could discuss the issue in a constructive way since the two
countries have friendly relations.13
Drug Trafficking and Money Laundering
An important concern for U.S. policymakers over the years has been securing
Panamanian cooperation to combat drug-trafficking and money-laundering. Panama
is a major drug-transit country for illicit drugs from South America to the U.S.
market because of its geographic location and its large maritime industry and
containerized seaports. Moreover, the country’s service-based economy, with a large
banking sector and trading center (Colón Free Zone), make Panama a significant drug
money laundering center.
Drug traffickers use fishing vessels, cargo ships, small aircraft, and go-fast boats
to move illicit drugs — primarily cocaine, but also heroin and Ecstasy — through
Panama. Some of the drugs are transferred to trucks for northbound travel or are
placed in sea-freight containers for transport on cargo vessels. Traffickers also utilize
hundreds of abandoned or unmonitored airstrips as well as couriers who transit
Panama by commercial air flights. There also has been increasing domestic drug
abuse, particularly among youth. Addiction has also increased significantly among
Panama’s Kuna indigenous population, whose lands lie just south of a transit zone
for Colombian cocaine.14 The country is also a small-scale producer of coca leaf in
the remote Darien province that borders Colombia. According to the Department of
State, security in Darien has improved in recent years, although the smuggling of
13 White House, Office of the Press Secretary, “President Bush Meets with President
Torrijos of Panama,” Nov. 7, 2005; Edwin Chen, “Bush’s Trip Ends with Discord,” Los
Angeles Times, Nov. 8, 2005; William Douglas, “Bush’s Last Stop: Panama,” Miami
Herald, Nov. 8, 2005.
14 Chris Kaul, “A New Foe Threatens Tribe’s Independent Spirit,” Los Angeles Times, Jan.
3, 2006; “Panama Tribe Faces Threat as Cocaine Comes Ashore,” Reuters, Feb. 18, 2006.

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CRS-10
weapons and drugs across the border continues. Drugs and arms trade associated
with Colombian terrorist groups also reportedly occurs in other parts of Panamanian
territory and in the country’s coastal waters, according to the U.S. Drug Enforcement
Administration.15
The State Department’s March 2006 International Narcotics Control Strategy
Report asserts that the United States and Panama cooperate closely on joint
counternarcotics effort and that Panama has demonstrated a commitment to build
strong law enforcement institutions and to disrupt the flow of illegal drugs to the
United States. The United States has provided equipment, training, and information
to enhance Panama’s interdiction and eradication capabilities. U.S. assistance is
supporting the restructuring of Panama’s law enforcement agencies to enhance their
abilities to fulfill their mission. According to the Department of State, continuation
of U.S. assistance is crucial in order to ensure effective Panamanian anti-drug efforts.
In 2006, Panamanian cooperation with the Drug Enforcement Administration
led to two successful anti-drug operations. In January 2006, more than 20 people
were arrested in New York and Panama in a heroin smuggling operation involving
dozens of “swallowers” who transported the drug.16 In May 2006, law enforcement
authorities from the United States, Panama, and several other countries broke up a
cocaine smuggling operation that used three islands on Panama’s Caribbean coast to
refuel fast boats and fishing trawlers carrying drugs.17
The State Department also maintains that even though Panama has made
significant progress in strengthening its anti-money laundering regime since 2000,
Panama needs to remain vigilant to the threat that money laundering poses to the
stability of the country’s legitimate financial institutions. After Panama was cited in
June 2000 as a non-cooperative country in the fight against money laundering by the
Financial Action Task Force (FATF), a multilateral anti-money laundering body, the
government took action to improve its laws. The government undertook a
comprehensive effort to improve its anti-money laundering regime; it enacted two
laws and issued two decrees in 2000. As a result of these efforts, the FATF removed
Panama from its non-cooperative country list in June 2001. Because of its extensive
offshore financial sector, with some 350,000 offshore-registered companies, Panama
continues to be categorized by the State Department as a country of primary concern
for money laundering.
U.S. Trade Relations and a Potential Free Trade Agreement
Panama and the United States began negotiations for a free trade agreement in
April 2004. Then U.S. Trade Representative Robert Zoellick formally notified
Congress in November 2003 that the Administration expected to launch such
15 U.S. Drug Enforcement Administration, “Panama: Country Brief,” May 2005, p. 12.
16 Jerry Seper, “DEA Breaks Drug Smuggling Ring of ‘Swallowers,’” Washington Times,
Jan. 28, 2006.
17 Chris Kraul, “Alleged Cocaine Kingpin Held in Brazil,” Los Angeles Times, May 20,
2006.

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CRS-11
negotiations during the second quarter of 2004. Zoellick maintained that negotiating
an FTA with Panama would further U.S. efforts to strengthen support for democracy
and “shared fundamental values” throughout the region. He maintained that the
agreement would enhance trade, promote respect for internationally recognized
worker rights, greater respect for the rule of law, sustainable development, and
accountable institutions of governance. Zoellick asserted that strong anti-corruption
and transparency requirements in the agreement would help combat corruption.18
With the exception of two years (1988-1989) when the United States was
applying economic sanctions on Panama under General Noriega’s rule, Panama has
been a beneficiary of the U.S. preferential import program known as the Caribbean
Basin Initiative (CBI) since its inception in 1984. The program was amended several
times and made permanent in 1990. CBI benefits were expanded in 2000 with the
enactment of the Caribbean Basin Trade Partnership Act (CBTPA) (Title II, P.L. 106-
200), which provided NAFTA-like trade benefits, including textile and apparel
benefits, to certain CBI countries, including Panama, until September 2008.
In the FTA being negotiated with the United States, Panama is looking for a
permanent extension of CBI benefits, which Panamanian officials believe would spur
U.S. investment in the country, and 10-15 year tariff phase-out periods for certain
sensitive agricultural products such as rice, sugar, and corn. Panamanian officials
acknowledged that Panama needs to make improvements in its enforcement of the
protection of intellectual property rights and in its protections for U.S. investors.
They also maintained that the FTA would lead to Panama easing some of its sanitary
and phytosanitary restrictions currently in place.19 USTR maintained that obtaining
Panama’s recognition of the U.S. meat inspection system will be a primary focus of
the FTA negotiations.20
To date, nine negotiating rounds have been held, with the most recent
concluding in mid-January 2006 in Washington. There had been expectations that the
negotiations would be completed in early 2005, but the eighth round held in February
2005 reflected continued contention over several issues. These include market access
for agricultural products considered sensitive by Panama (such as rice, poultry,
onions, potatoes, pork, beef, dairy products, soybean oil, and vegetable oil);
procurement provisions for the Panama Canal Authority regarding expansion
activities; access to Panama for large U.S. retail stores; and verification that textile
exports from Panama meet the agreement’s rules of origin.21
18 Office of the United States Trade Representative, “USTR Notifies Congress of Intern to
Initiate Free Talks with Panama,” Press Release, Nov. 18, 2003.
19 “Panama Seeks Permanent CBI Extension in Free Trade Deal with U.S.” Inside U.S.
Trade, Dec. 19, 2003.
20 United States Trade Representative. 2004 National Trade Estimate Report on Foreign
Trade Barriers. Apr. 1, 2004.
21 “U.S., Panama Again Fail to End FTA Talks, No Date Set for Next Round,” Inside U.S.
Trade, Feb. 11, 2005.

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CRS-12
The ninth round in January 2006 ended with disagreement on sanitary control
systems for U.S. products and animals to enter the Panamanian market. The United
States wants Panama to recognize U.S. sanitary control systems, which the
Panamanian negotiations reportedly did not accept.22 The next round will be held
after Panama concludes a “scientific study” on the consequences for the country of
changing its phytosanitary standards. The issue, which remains sensitive in Panama,
led to the resignation of Panama’s Agriculture Minister on January 10, 2006, who
maintained that he had resigned because of his concerns that Panama would be
compelled to compromise its food health standards in order to complete negotiations
for the free trade agreement.23 Although FTA negotiations were suspended until after
Panama held its referendum on the Canal expansion project, some observers believe
that an agreement still could be finalized by the end of 2006.24
Panama generally has stronger labor laws than its Central American neighbors,
but given that the labor chapter in the agreement reportedly will be identical to that
in the U.S.-Dominican Republic-Central America Free Trade Agreement (DR-
CAFTA), it is unclear how Congress might receive the Panama agreement.25 In
congressional debate over DR-CAFTA, some Members had objected that the
agreement did not include enforceable labor provisions that would allow for the
suspension of trade benefits, as in the case of preferential trade arrangements such
as the Caribbean Basin Initiative and the Generalized System of Preferences.
Since Panama has a service-based economy, it traditionally has imported much
more than it exports to the United States. In 2005, the U.S. trade surplus with
Panama was $1.8 billion, with Panama exporting $327 million in goods and
importing $2.2 billion in merchandise. Panama was the 45th largest U.S. export
market in 2005.26 Panama’s major exports include fish and seafood (accounting for
one-third of its exports to the United States), and sugar, coffee, and other agricultural
products, while major imports include oil, consumer goods, foodstuffs, and capital
goods. Almost half of Panama’s exports are destined for the United States, while
almost one-third of its imports are from the United States.27
22 Marion Barbel, “Free Trade Negotiations Inconclusive for Panama and the U.S.,” World
Markets Research, Jan. 16, 2006.
23 “Panama: Agriculture Minister Resigns Over U.S. Trade Deal,” Latinnews Daily, Jan. 11,
2006; “Panama to Conduct “Scientific Study” Before Resuming FTA Negotiations with
U.S.,” El Panama America (Panama City, Panama), Jan. 14, 2006.
24 “Panama FTA Still Seen as Possible as Talks Resume Next Week,” Inside U.S. Trade,
October 20, 2006.
25 See CRS Report RL32540, The Proposed U.S.-Panama Free Trade Agreement, by J. F.
Hornbeck.
26 United States Trade Representative, 2006 National Trade Estimate Report on Foreign
Trade Practices.
27 “Panama: Economic Structure, EIU ViewsWire, Mar. 23, 2004.

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CRS-13
The stock of U.S. foreign investment in Panama was estimated at $5.2 billion
in 2005, largely concentrated in the financial and wholesale sectors. This surpassed
the combined U.S. foreign investment in the five other Central American nations.28
Operation and Security of the Panama Canal
Historical Background and the Panama Canal Treaties. When Panama
proclaimed its independence from Colombia in 1903, it concluded a treaty with the
United States for U.S. rights to build, administer, and defend a canal cutting across
the country and linking the Pacific and Atlantic oceans. (See Figure 1, Map of
Panama, at the end of this report.) The treaty gave the United States rights in the so-
called Canal Zone (about 10 miles wide and 50 miles long) “as if it were sovereign”
and “in perpetuity.” Construction of the canal was completed in 1914. In the 1960s,
growing resentment in Panama over the extent of U.S. rights in the country led to
pressure to negotiate a new treaty arrangement for the operation of the Canal. Draft
treaties were completed in 1967 but ultimately rejected by Panama in 1970.
New negotiations ultimately led to the September 1977 signing of the two
Panama Canal Treaties by President Jimmy Carter and Panamanian head of
government General Omar Torrijos. Under the Panama Canal Treaty, the United
States was given primary responsibility for operating and defending the Canal until
December 31, 1999. (Subsequent U.S. implementing legislation established the
Panama Canal Commission to operate the Canal until the end of 1999.) Under the
Treaty on the Permanent Neutrality and Operation of the Panama Canal, or simply
the Neutrality Treaty, the two countries agreed to maintain a regime of neutrality,
whereby the Canal would be open to ships of all nations. The U.S. Senate gave its
advice and consent to the Neutrality Treaty on March 16, 1978, and to the Panama
Canal Treaty on April 18, 1978, both by a vote of 68-32, with various amendments,
conditions, understandings, and reservations. Panama and the United States
exchanged instruments of ratification for the two treaties on June 16, 1978, and the
two treaties entered into force on October 1, 1979.
Some treaty critics have argued that Panama did not accept the amendments,
conditions, reservations, and understandings of the U.S. Senate, including the
DeConcini condition to the Neutrality Treaty. That condition states: “if the Canal is
closed, or its operations are interfered with, the United States of America and the
Republic of Panama shall each independently have the right to take such steps as
each deems necessary, in accordance with its constitutional processes, including the
use of military force in the Republic of Panama, to reopen the Canal or restore the
operations of the Canal, as the case may be.” However, others argued that Panama,
in fact, had accepted all U.S. Senate amendments. The State Department asserted
that Panama expressly accepted all amendments, conditions, and understandings to
the two treaties, including the DeConcini condition. The United States and Panama
signed the instruments of ratification for both treaties, which incorporated all the
Senate provisions. The two countries cooperated throughout the years on matters
related to the canal and established five binational bodies to handle these issues.
28 U.S. Department of Commerce, Bureau of Economic Analysis, “Survey of Current
Business,” Sept. 2006, p. 106.

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CRS-14
Two of the bodies were set up to address defense affairs and conducted at least
sixteen joint military exercises between 1979 and 1985 involving Panamanian and
U.S. forces.
Canal Transition and Current Status. Over the years, U.S. officials
consistently affirmed a commitment to follow through with the Panama Canal Treaty
and turn the Canal over to Panama at the end of 1999. That transition occurred
smoothly on December 31, 1999. The Panama Canal Treaty terminated on that date,
and the Panama Canal Commission (PCC), the U.S. agency operating the Canal, was
succeeded by the Panama Canal Authority (ACP), a Panamanian government agency
established in 1997.
Under the terms of the Neutrality Treaty, which has no termination date, Panama
has had responsibility for operating and defending the Canal since the end of 1999.
As noted above, both Panama and the United States, however, in exercising their
responsibilities to maintain the regime of neutrality (keeping the Canal secure and
open to all nations on equal terms) independently have the right to use military force
to reopen the Canal or restore its operations. This is delineated in the first condition
of the Neutrality Treaty.
The secure operation of the Panama Canal remains a U.S. interest since about
13-14% of U.S. ocean-borne cargo transits through the Canal. The United States
provides assistance to Panama to improve its ability to provide security for the Canal
and to enhance port and maritime security. In March 2003 congressional testimony,
then SOUTHCOM Commander General James Hill stated that Panama was “capable
of defending the Canal” and noted that the Canal was “operating very efficiently.”29
During a November 2004 visit to Panama, Secretary of Defense Donald Rumsfeld
praised Panama’s efforts to protect the Canal.30
Headed by Alberto Alemán Zubieta, the Panama Canal Authority has run the
Canal for more than six years and has been lauded for increasing Canal safety and
efficiency. Nevertheless, international shipping organizations strongly opposed a
sharp toll increase announced by Panama in February 2005 that is being implemented
over three years.
In January 2006, the Torrijos government established a social investment fund
backed by Panama Canal revenues that will invest in schools, hospitals, bridges,
roads, and other social projects. The initiative, according to the government, would
show Panamanians that the Canal is contributing to economic development and
improving the quality of life for Panamanians.31
29 Hearing of the Senate Armed Services Committee, “Testimony of Unified and Regional
Commanders on Military Strategy and Operational Requirements in Review of the FY2004
Defense Authorization Request,” Mar. 13, 2003, Federal News Service.
30 Thom Shanker, “Rumsfeld Praises Panama Canal Security,” New York Times, Nov. 15,
2004.
31 Rainbow Nelson, “Canal Cash to Pay for Social Development,” Lloyd’s List, Jan. 18,
2006.

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CRS-15
Canal Expansion Project. On April 24, 2006, the Panama Canal Authority
presented to President Torrijos its recommendation to build a third channel and new
set of locks (one on the Atlantic and one on the Pacific) that will double the capacity
of the Canal and allow it to accommodate giant container cargo ships known as post-
Panamax ships. The proposal would also widen and deepen existing channels and
elevate Gatun Lake’s maximum operating level. According to the proposed plan, the
overall project would begin in 2007 and take from seven to eight years to complete.
The estimated cost of the project is $5.25 billion, to be self-financed by the ACP
through graduated toll increases and external bridge financing of about $2.3 billion
that would be paid off in about 10 years. The Panamanian government would not
incur any sovereign debt as a result of the project. According to the ACP, the overall
objectives of the expansion project are to (1) achieve long-term sustainability and
growth for the Canal’s financial contributions to the Panamanian national treasury;
(2) maintain the Canal’s competitiveness; (3) increase the Canal’s capacity to capture
the growing world tonnage demand; and (4) make the Canal more productive, safe,
and efficient.32
President Torrijos and his Cabinet approved the expansion project on June 14,
2006, and the Legislative Assembly overwhelmingly approved it on July 10, 2006,
with 72 out of 78 deputies voting for the project. Pursuant to Panama’s Constitution
(Article 319), the project had to be submitted to a national referendum no sooner than
90 days from the date of approval by the Assembly. The Torrijos government chose
to hold the referendum on October 22, 2006, close to the anniversary of October 23,
1977, the date when Panamanians approved the two Panama Canal treaties in a
national plebiscite by a two-to-one margin. A poll from early September 2006
showed almost 64% public support for the Canal expansion project, but on election
day the expansion project received 78% of the vote.
The referendum in part can also be viewed as support for the Torrijos
government, which advanced the project as integral to Panama’s future economic
development. The government maintains that some 7,000 direct jobs will be created
by the project, as well as some 35,000 indirect jobs. President Torrijos asserts that
increased revenue from the Canal arising from the expansion project will allow the
government to launch social development programs and improve living conditions
in the country.33 As noted above, U.S. officials congratulated Panama on the success
of the referendum but also noted that Panama’s challenge is to ensure that the project
is implemented with transparency and without any hint of corruption.
There had been some vocal opposition to the Canal expansion project. The
organization known as the Peasant Coordinator Against the Dams (CCCE,
Coordinadora Campesina Contra los Embalses), consisting of agricultural, civil, and
environmental organizations, asserts that the expansion project will lead to flooding
and will drive people from their homes. An umbrella protest group known as the
32 Autoridad del Canal de Panama (ACP), “Proposal for the Expansion of the Panama Canal,
Third Set of Locks Project,” April 24, 2006.
33 “Panama: Torrijos Wins Backing to Expand Canal,” Latin American Weekly Report,
October 24, 2006; “Panama’s Torrijos on Referendum Results: ‘Opportunity to Materialize
Our Hopes,” Open Source Center (Panama City TVN), October 23, 2006.

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CRS-16
National Front for the Defense of Economic and Social Rights (Frenadeso), which
was formed in 2005 during protests against social security reforms, called for a “no”
vote.34 Former Presidents Jorge Illueca and Guillermo Endara, as well as former
Panama Canal administrator Fernando Manfredo, also opposed the expansion project,
maintaining that the price is too high and too much of a gamble. Critics fear that
the total price tag could rise considerably and are concerned that toll increases could
make alternative routes more economically attractive.35
Privatization of Two Panamanian Ports and the China Issue. A
controversy that arose in U.S.- Panamanian relations in 1996 and continued through
1999 relates to the privatization of two Panamanian ports at either end of the Panama
Canal, Balboa on the Pacific and Cristobal on the Atlantic. In July 1996, the
Panamanian government awarded the concession to operate the ports to a Hong Kong
company, Hutchison International Port Holdings, one of the world’s largest container
port operators and a subsidiary of the Hutchison Whampoa Limited Group. The
company operates the concession in Panama as the Panama Ports Company, S.A.
Then U.S. Ambassador to Panama William Hughes complained about the lack
of transparency in the bidding process in which several U.S. companies competed.
The Panamanian government responded with a communique describing the process
by which Hutchison was awarded the 25-year concession. Panamanian officials
maintain that Hutchison had the highest bid, agreeing to pay Panama $22.2 million
annually over the life of the concession. In May 1997, six U.S. Senators charged in
a letter to the Federal Maritime Commission that irregularities in the bidding process
denied U.S. companies an equal right to develop and operate terminals in Panama.
After a review of the issue, the Commission responded that while the port award
processes were unorthodox and irregular by U.S. standards, it saw no evidence that
U.S. companies were subjected to discriminatory treatment. A May 1997 Senate
Foreign Relations Committee staff report on the issue also concluded that while the
bidding process was unorthodox, U.S. officials found no evidence of illegality.36
In addition to the privatization process, some press reports in March 1997 raised
the issue of Hutchison’s relationship with the Chinese government and the China
Ocean Shipping Company (COSCO) and suggested that China would gain control
of the Panama Canal or threaten the operation of the Canal. Over the years, U.S.
officials, however, have consistently confirmed that Hutchison’s operations of the
ports does not constitute a threat to the Canal. The same May 1997 Senate Foreign
Relations Committee staff report mentioned above concluded that legal safeguards
in the Panama Canal Treaties and Panamanian law guarantee the continued operation
of the Canal and ensures its access to all nations. (Also see CRS Report 97-476, Long
34 “Torrijos Appeals for Approval of Canal Expansion,” Latinnews Daily, Sept. 1, 2006.
35 “Panama: Torrijos Reveals Plans to Expand Canal,” Latinnews Daily, April 25, 2006;
Chris Kraul and Ronald D.White, “Panama is Preparing to Beef up the Canal,” Los Angeles
Times, Apr. 24, 2006; John Lyons, “Panama Takes Step Toward Expanding the Canal,” Wall
Street Journal, April 24, 2006.
36 Senate Committee on Foreign Relations. Staff Report on the Privatization of Panamanian
Ports. May 1997.

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CRS-17
Beach: Proposed Lease by China Ocean Shipping Company (COSCO) at Former
Naval Base.)
In early August 1999, Senator Trent Lott raised questions about Chinese
influence over the Canal in a letter to Defense Secretary William Cohen.
Subsequently, both the State Department and the Department of Defense made
statements responding to the concerns raised about potential Chinese influence in
Panama. In an August 12, 1999, press briefing, the Department of Defense noted that
it does not consider Hutchison’s ownership of two port facilities as a threat to U.S.
security. DOD asserted that “the company does not have any ability to stop or
impede traffic through the Canal” and noted that under the Neutrality Treaty, “the
United States has a unilateral right to maintain the neutrality of the Canal and reopen
it if there should be any military threat.” The State Department, in an August 12,
1999, press briefing, noted that it has seen “no capability or interest on the part of the
People’s Republic of China, a major user of the Canal, to disrupt its operations.”
According to September 29, 1999, congressional testimony by Peter Romero,
then Acting Assistant Secretary of State for Western Hemisphere Affairs (before the
House International Relations Committee, Subcommittee on the Western
Hemisphere), the U.S. intelligence community also studied the question of the
influence of China in Panama as a result of the concession. Romero testified that,
after reviewing the study, the State Department concluded that the Hutchison
concession “does not represent a threat to canal operations or other U.S. interests in
Panama.”
On October 22, 1999, the Senate Armed Services Committee held a hearing on
Canal security. Officials from the Department of Defense, the Panama Canal
Commission, the SOUTHCOM, and the Department of State testified, and all
concluded that the Hutchison’s port operations did not constitute a threat to the
Canal. Ambassador Lino Gutierrez, Principal Deputy Assistant Secretary of State for
Western Hemisphere Affairs, stated that the Department found no information to
substantiate the allegation that Hutchison is a front for the People’s Republic of
China. He noted that Panama’s contract with Hutchison (Law 5) does not give China
any role in determining which ships will pass through the Canal or in which order
they will travel, and it does not give Hutchison any control over Canal pilots.
Alberto Aleman Zubieta, Administrator of the Panama Canal Commission, stated
that “Hutchison has no authority whatsoever to interfere with, dictate or influence the
operation of the Canal, nor will it ever be allowed to do so.” Gen. Charles Wilhelm,
SOUTHCOM Commander in Chief, stated: “We are not aware of any current internal
or external threats to the Panama Canal, and we have no evidence that it has been
targeted by terrorists or foreign governments.”
More recently, in April 2004, the issue of Hutchison’s operations of the ports
was raised during a hearing of the Senate Armed Services Committee. In response
to a question, General James T. Hill, Commander of SOUTHCOM, asserted that

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CRS-18
Hutchison’s operations of the ports in Panama have not had a negative impact on the
security of the Canal.37
Contamination of Firing Ranges and San Jose Island
Another issue in relations has been Panama’s desire to have the United States
clean up three former firing ranges (Empire, Piña, Balboa West) used by the U.S.
military for live-fire exercises and testing of ground explosives during its tenure in
the country. The Piña range was turned over to Panama in June 1999, while the
Empire and Balboa West ranges were turned over in July 1999. Some 60,000
Panamanians live in areas surrounding the ranges, and reportedly at least 24
Panamanians have been killed in the last two decades by coming into contact with
the explosives.38 Estimates of the cost to clean up the unexploded bombs and other
contaminants range from $400 million to $1 billion.39
U.S. officials maintain that it is not possible to remove the unexploded
ordinance without tearing down the rain forest and threatening the Canal’s watershed.
They also point to a Canal treaty provision which states that the United States is
obligated to take all measures “insofar as may be practicable” in order to ensure that
hazards to human life, health and safety were removed from the defense sites
reverting to Panama. In response to a press question while attending Panama’s
centennial celebration in November 2003, Secretary of State Colin Powell maintained
that the United States had already met its obligations to clean up the ranges.40
The controversy over the U.S. cleanup of the ranges at times has been an irritant
in the bilateral relationship, but at this juncture appears to be somewhat of a dormant
issue. Officials of the Pérez Balladares government (1994-1999) believed that the
United States was reneging on its treaty commitment and wanted to press the United
States to clean up the firing ranges regardless of economic cost. The Moscoso
government raised the issue during her October 19, 1999, meeting with then
President Clinton in Washington. At the time, President Clinton stated that the
United States had met its treaty obligations to clean up the ranges to the extent
practicable, but did say that the United States wanted to stay engaged and work with
Panama on the issue. The issue also came up during then Secretary of State
Albright’s visit to Panama on January 15, 2000. In a December 2001 letter to
Secretary of State Colin Powell, Panama’s Foreign Minister reiterated his county’s
37 Hearing of the Senate Armed Services Committee, “Defense Authorization Request for
Fiscal Year 2005,” Apr. 1, 2004, Federal News Service.
38 “No Home on Panama’s Range, U.S. Munitions Scattered Over Canal Training Zones,”
Washington Post, Jan. 10, 2000; Vanessa Hua, “U.S. Weapons, U.S. Mess? Panama,”
Bulletin of the Atomic Scientists, July 1, 2002.
39 “An Expensive Farewell to Arms: The U.S. Has Abandoned 51 Military Sites in Canada.”
The Gazette (Montreal), Apr. 28, 2001.
40 U.S. Department of State. International Information Programs. Washington File. “Colin
Powell Hails Panama’s 100 Years of Independence,” Nov. 3, 2004.

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CRS-19
call to clean up the three firing ranges.41 In April 2003, Panamanian Foreign Minister
Harmodio Arias asserted that the issue of clearing the firing ranges was not dead.42
As noted above, during a November 2005 visit to Panama, President Bush reiterated
the view that the United States had met its obligations under the treaty.
On another sensitive issue, U.S. Embassy officials in Panama announced in May
2002 that a plan was being prepared to clean up Panama’s San Jose Island, which
was contaminated with chemical weapons used in training exercises during World
War II.43 The Organization for the Prohibition of Chemical Weapon (OPCW) had
confirmed in July 2001 that there were several live chemical bombs on the island,
and Panama evacuated residents of the island.44 In September 2003, however,
Panama rejected a U.S. offer for the environmental cleanup of the island that would
have reportedly offered more than $2 million in equipment and training so that
Panama could clean up the island. According to Foreign Minister Harmodio Arias,
Panama rejected the offer because it did not want to sign a document releasing the
United States from all liabilities.45 A provision in the FY2004 Foreign Operations
appropriations measure (P.L. 108-199, Division D) would have permitted Foreign
Military Financing for the San Jose Island cleanup.
During a November 2004 visit to Panama, Secretary of Defense Donald
Rumsfeld indicated that issues involving both the firing ranges and San José Island
were considered closed.46 At the time, Panamanian officials, however, maintained
that both were pending bilateral issues.47
Former U.S. Military Presence in Panama
Under the terms of the Panama Canal Treaty, all U.S. military forces withdrew
from Panama by December 31, 1999, since no mutual agreement was reached to
continue their presence. At that time, Panama assumed responsibility for defending
as well as operating the Canal. Nevertheless, under the terms of the Treaty on the
Permanent Neutrality and Operation of the Canal, often referred to as the Neutrality
41 “Panama Asks U.S. Military to Clean Up Former Bases,” Agence France Presse, Dec.
27, 2001.
42 Foreign Broadcast Information Service, Highlights: Central America Press, Apr. 8, 2003
(“Panamanian Foreign Minister Says Firing Range Cleanup Not Dead Issue,” La Prensa)
43 “U.S. Creates Chemical Weapon Clean-up Plan on Panamanian Island.” EFE News
Service, May 27, 2002.
44 “Panama-U.S. Panama Clears Isle After Finding World War II Chemical Weapons.” EFE
News Services, Sept. 6, 2001.
45 Victor Torres, “Foreign Minister Explains Why Panama Rejected U.S. San Jose Island
Cleanup Offer,” La Prensa (Panama), Oct. 12, 2003 (as translated by Foreign Broadcast
Information Service).
46 “Donald H. Rumsfeld Holds Joint News Conference with the Panamanian Minister of
Government & Justice,” FDCH Political Transcripts, Nov. 13, 2004.
47 “Donald Rumsfeld in Panama Says Contaminated Firing Ranges ‘Closed Case,’” BBC
Monitoring International Reports, Nov. 14, 2004.

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CRS-20
Treaty, the United States will have the right to use military force to reopen the canal
or restore its operations.
Former Role and Presence of U.S. Troops. Over the years, U.S. military
forces in Panama had several functions. The primary purpose of the troops was to
provide for the defense of the Panama Canal, as set forth in the Panama Canal
Treaties, until December 31, 1999. Another function served by the presence of the
U.S. military in Panama stemmed from its activities throughout Latin America. Until
late September 1997, Panama served as the headquarters of the U.S. Southern
Command (SOUTHCOM), a unified command responsible for all U.S. military
operations south of Mexico. In March 1995, President Clinton announced that
SOUTHCOM headquarters, located at Quarry Heights in Panama, would be moved
to Miami. The move began in June 1997 and was completed by the end of
September 1997. U.S. bases in Panama provided assistance to Latin American
nations combating drug trafficking with aerial reconnaissance and counter-narcotics
training. Howard Air Force Base in Panama provided secure staging for detection,
monitoring, and intelligence collecting assets. Panama also provided unique
opportunities and facilities for military training, including the Jungle Operations
Training Center (which was deactivated on April 1, 1999) at Fort Sherman, Panama.
By the end of December 1999, all U.S. forces had withdrawn from Panama, and
all of the U.S. bases and facilities had reverted to Panamanian control. Ten major
installations were returned to Panama over a four-year period: Fort Davis and Fort
Espinar in early September 1995; Fort Amador, at the Pacific entrance to the Canal,
on October 1, 1996; Albrook Air Force Station on October 1, 1997; Galeta Island (a
former U.S. Naval Security Group Activity that passed to Army control in 1995) on
March 1, 1999; Rodman Naval Station on March 11, 1999; Fort Sherman, on the
Atlantic side, on June 30, 1999; and Howard Air Force Base, which ceased air
operations in May 1999, was officially turned over to Panama on November 1, 1999,
along with Fort Kobbe. Finally, Fort Clayton and was turned over on November 30,
1999.
Failed Negotiations. In September 1995, President Clinton and President
Pérez Balladares met in Washington and announced that the two countries would
begin informal discussions to determine if there was mutual interest in the United
States maintaining a military presence in Panama beyond the end of 1999. Those
talks never materialized, but instead there were a series of bilateral talks regarding
a U.S. contribution to a Multinational Counternarcotics Center (MCC). President
Pérez Balladares had announced in July 1996 that Panama would be willing to allow
the United States to use Howard Air Force Base, at no cost, as an international drug
interdiction center. He stated that Panama would “provide the facility free of charge
as part of our contribution to the drug war.”
Talks on a potential MCC began in late November 1996 and ultimately led to
a tentative agreement, announced December 24, 1997, on the establishment of a
MCC with the United States contributing troops for the center. Despite the tentative
accord, progress on a final agreement was stymied during 1998, and on September
25, 1998, both countries announced that they were ending the MCC talks without a
final accord.

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CRS-21
As described in the press, the MCC would have involved about 2,000 U.S.
troops operating at Howard Air Force Base, Rodman Naval Station, and Fort Kobbe
on the Pacific side of the Canal. Other facilities reportedly to be utilized would have
been communication facilities at Galeta Island and Corozal. Panama would have
provided free use of the bases, while the United States would have been expected to
pay for such facilities as housing. The MCC reportedly would have been established
for a 12-year period, renewable for additional five-year periods, with the potential
participation of other Latin American nations. Reportedly the MCC would have had
a Directors’ Council made up of the foreign ministers of participating countries and
presided over by Panama’s foreign minister. If the United States and Panama had
agreed on the MCC, the next step would have been for Panama’s Legislative
Assembly to approve the agreement, which then would have been subject to a
national referendum in Panama.
As early as April 1998, the Clinton Administration had expressed concern that
negotiations would have to be concluded soon, or the United States would be forced
to locate the U.S. anti-drug operations elsewhere. Although the text of the draft
MCC accord was not made public, press reports indicated that one problem in the
negotiations was a provision that would permit U.S. soldiers to engage in other
missions beyond counter-narcotics. Panama and several Latin American nations
expected to join the MCC expressed reservations about this aspect of the accord, with
concerns centered on the potential for U.S. military intervention in the region. U.S.
officials, however, maintained that U.S. military activities beyond anti-narcotics
work would consist of such benign activities as search and rescue and disaster relief.
Another reported problem in the negotiations was the U.S. rejection of Panama’s call
to allow a change in the agreement, whereby the center could be dissolved after three
years if the drug trafficking problem diminished.
Some participants, including former Ambassador Thomas McNamara, the lead
negotiator in the talks with Panama, believe that the main reason that an agreement
was not reached was Panama’s internal politics. While Panamanian opinion polls
overwhelmingly favored a continued U.S. military presence, the President appeared
concerned about vocal opposition, even from within his own party, to the proposed
center. Moreover, President Pérez Balladares was actively seeking a constitutional
change for a second term of office, and this appeared to have influenced the MCC
negotiations.
In early December 1998, U.S. officials announced that they had begun talks with
several Latin American countries to find new bases of operation in Central and South
America for the anti-drug missions formerly undertaken in Panama. Short-term
interim agreements were concluded in April 1999 to have Forward Operating
Locations (FOLs) in Ecuador, Aruba, and Curaçao for U.S. aerial counternarcotics
missions. Subsequently, the United States concluded longer-term 10-year agreements
with Ecuador and with the Netherlands (for Aruba and Curaçao) for the anti-drug
FOLs. An additional FOL site also was being sought in Central America, and on
March 31, 2000, a 10-year agreement was signed with El Salvador.
In 1999, some Members of the U.S. Congress and politicians in Panama
suggested that there was still an opportunity for the United States to negotiate the use
of facilities in Panama for U.S. anti-drug flights, similar to the FOLs negotiated with

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CRS-22
Ecuador, Aruba, and Curacao. Press reports suggested that President-elect Moscoso
was interested in allowing the U.S. military to use Panama as a staging area for anti-
drug flights. In 2000, however, President Moscoso turned down a request from the
United States for a visiting military forces agreement. On September 26, 2000, she
announced that Panama would not participate in a visiting forces agreement with the
United States.
U.S. Congressional Views on U.S. Military Presence. Before
December 1999, Congress had twice gone on record favoring negotiations to consider
a continued U.S. presence in Panama beyond the end of 1999, and in the 104th
Congress the Senate approved a non-binding resolution on the issue. In 1991,
Congress enacted legislation (P.L. 102-190, Section 3505) expressing the sense of
Congress that the President should begin negotiations with Panama to consider
whether the two nations should allow the permanent stationing of U.S. forces in
Panama past 1999. Twelve years earlier, Congress had approved the Panama Canal
Act of 1979 (P.L. 96-70, Section 1111) which states that “it is the sense of the
Congress that the best interests of the United States require that the President enter
into negotiations” with Panama “for the purpose of arranging for the stationing of
United States military forces after the termination of the Panama Canal Treaty.” And
on September 5, 1996, the Senate approved S.Con.Res. 14, expressing the sense of
Congress that the President should negotiate a new base rights agreement with
Panama, while consulting with Congress regarding any bilateral negotiations that
take place.
In the 106th Congress, numerous measures were introduced relating to a
continued U.S. military presence in Panama as the Canal turnover approached, but
no legislative action was taken on these measures. The measures would have urged
the President to negotiate a new base rights agreement with Panama to permit U.S.
troops beyond December 31, 1999 (S.Con.Res.59, S.J.Res.37, H.Con.Res. 233);
expressed the sense of the Congress that the United States should negotiate security
arrangements with Panama to protect the Canal and to ensure Panama’s territorial
integrity (H.Con.Res. 186/S.Con.Res.61); authorized and directed the President to
renegotiate the Panama Canal Treaties to provide for the security of the Canal (H.R.
2244); and expressed the sense of the Senate that the President should negotiate
security arrangements with Panama regarding the protection of the Canal and that any
attack on or against the Canal would be considered an act of war against the United
States (S.Res. 257). One measure (H.R. 3452) would have provided that unpaid
balances of the Panama Canal Commission be payable to Panama only upon
completion of an agreement that leases half of Howard Air Force Base to the United
States.
In the second session of the 106th Congress, H.R. 3673, introduced by
Representative Benjamin Gilman, and reported by the House International Relations
Committee (H.Rept. 106-803, Part I), would have provided Panama with certain
benefits if Panama agreed to permit the United States to maintain a presence there
sufficient to carry out counternarcotics and related missions from Panama. The
benefits would have been preferential trade access to the U.S. market; a scholarship
program for Panamanians to study in the United States; and assistance for
infrastructure construction. Supporters argued that the bill offered an opportunity for
the United States to regain its traditional military presence in Panama and restore full

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CRS-23
U.S. military capability to perform anti-narcotics missions in the region. Opponents
argued that Panama had not expressed interest in regaining a U.S. military presence
in the country and believed that it could jeopardize talks underway with Panama for
a “visiting forces” agreement. The State Department expressed opposition to the bill
for several reasons. It maintained that there was a lack of credible support in Panama
for any agreement to re-establish a U.S. military presence there; that the quid pro quo
nature of the offer to Panama would give the appearance of the United States paying
rent for the right to establish a military presence, and U.S. policy was not to pay rent
for foreign bases or base rights; and that the trade benefits offered for Panama could
violate the most-favored-nation obligation of the World Trade Organization. State
Department officials also pointed out that trade benefits for Panama and other
Caribbean Basin countries had been enacted into law in May 2000 as part of the U.S.-
Caribbean Basin Trade Partnership Act (Title II of P.L. 106-200).
In the 107th Congress, just a single resolution was introduced related to the
stationing of U.S. troops in Panama, but no legislative action was taken on the
measure. H.Con.Res. 296, introduced by Representative Bob Barr on December 20,
2001, would have urged the President to negotiate a new base rights agreement with
Panama in order for U.S. Armed Forces to be stationed there for purposes of
defending the Canal.
In the 108th Congress, H.Con.Res. 9, introduced by Representative Virgil
Goode, is identical to H.Con.Res. 296 introduced in the 107th Congress described
above. The resolution would urge the President to negotiate a new base rights
agreement with Panama for the purposes of defending the Panama Canal.
Panamanian Views on U.S. Military Presence. Prior to the departure of
U.S. troops at the end of 1999, public opinion polls in Panama cited overwhelming
support for a continued U.S. military presence. Some Panamanians focused on the
importance of continuing a U.S. military presence to help conduct counternarcotics
operations in Panama and in the region. They pointed with concern to incursions of
Colombian narco-traffickers into the Darien jungle region of Panama. Despite the
polls, Panamanian opponents to the MCC were vocal and staged protests at various
times. In 1997, there were several protests by student, human rights, and labor
groups who opposed a continued U.S. presence. An umbrella organization was
formed known as the Organizations Against Military Bases, which included some
30 labor, peasant, and student groups. In early 1998 another umbrella organization
against U.S. military presence was formed, the National Movement for the Defense
of Sovereignty, consisting of labor, student, and professional organizations. These
groups argued for the need to break what they regarded as Panama’s dependent
relationship with the United States and recover its own national identity.

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CRS-24
Figure 1. Map of Panama
Panama
C a r i b b e a n
Canal
CAYMAN
S e a
ISLANDS
COSTA
Madden
SA
BOCAS
N B
RICA
Car i b b e an
Lake
L
Gatun
Lago
AS
Sea
DEL TORO
Golfo de los
Lake
Bayano
COLON
Mosquitos
PANAMA
P a c i f i c
O c e a n
Bay of
COLOMBIA
Panama
COCLE
CHIRIQUI
A r c h i p i e l a g o
VERAGUAS
Isla del
D e L a s P e r l a s
Ray
Golfo de Chiriqui
G u l f o f
DARIEN
P a n a m a
Panama
LOS
International Boundary
SANTOS
Province Boundary
Isla de
National Capital
Province Capital
Cebaco
COLOMBIA
Isla de
San Blas is a territory (comarca).
Coiba
0
25
50
75 Kilometers
N O R T H P A C I F I C O C E A N
0
25
50
75 Miles
Source: Map Resources. Adapted by CRS. (K.Yancey 5/25/06)

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